Do New Mortgage Rules Hurt or Help First-Time Buyers?

Experts say new mortgage rules may appear onerous, but ultimately they can help prevent first-time buyers from stretching themselves too thin.

Published on Thu Aug 30 2012

Strict new mortgage rules that take aim at household debt and unchecked borrowing are expected to hit first-time homeowners hardest but will also impact those looking to renew their mortgage or take out home equity loans.

However, according to a recent survey, there's a lack of awareness among Canadians about the new measures, which took effect July 9. A recent Bank of Montreal study reported that almost half (49 per cent) of those polled were not familiar with the new terms and what their effect would be, and only (45 per cent) knew the amortization period had been shortened.

Under the new policy, the maximum amortization period has been reduced from 30 years to 25 for government-insured mortgages. Also, lenders can now only issue home equity loans up to a maximum of 80 per cent, down from 85 per cent, of a property’s value. Finally, homes worth more than $1-million are no longer eligible for government-insured mortgages.

The rules may appear onerous, but ultimately they can help prevent first-time buyers from stretching themselves too thin, experts say.

“The new rules are prudent and timely and should help ease the debt burden faced by many households and prospective homebuyers,” says Frances Hinojosa, mortgage expert at BMO Bank of Montreal. “By shortening the life of the mortgage, the [borrowers] will pay less in interest.”

An amortization of 25 years or fewer allows Canadians to build equity in their home faster and become mortgage-free sooner.

Marcus Arkan, CEO, principal broker of Syndicate Mortgages Inc. in Toronto, says despite the new rules, it just might be cheaper for first-time buyers to own than to rent. “The silver lining is that mortgage rates are extremely low, with many lenders offering close to 3 per cent for five-year fixed terms,” he says. “Their rates may be even lower for shorter terms. There is still hope for first-timers as it is only $478 a month per $100,000 borrowed for their mortgage payments.”

But these historic low interest rates will not be around forever. Homebuyers are advised to factor in future rate hikes and calculate the impact of the new rules down the road.

A monthly payment on a $350,000 mortgage at 4 per cent interest over 25 years is around $1,813. This amount can jump to $2,717 if the interest rate is hiked up to 8.5 per cent.

Hinojosa agrees, but says a shorter amortization period also means there are significant savings to be realized. “The reduction of the maximum amortization will be beneficial for Canadians in the long-term,” he says. “You can save thousands of dollars in interest costs over the life of your mortgage.”

But, for now, according to the BMO survey, potential home buyers say they are less likely to buy a new house in the next five years. Those who still plan to will likely spend less.

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